D&O is experiencing overwhelming orders for its automotive LED with the demand surge expected to continue for the foreseeable future. In preparation for a multi-year growth spurt, D&O is: (i) expanding its Plant 1 capacity by 25% in 2HCY21, (ii) prepping its Plant A for Smart LED production in 2022, and (iii) planning a new Plant B for other cutting-edge exterior products, to be ready in 2023. We expect record breaking earnings in FY21 with strong quarterly YoY growth. Reiterate OUTPERFORM with a higher TP of RM5.50.

Rising demand for automotive sets to continue. This is evident by the growth streak in China which extended its car sales growth to 10 consecutive months since the rebound from Covid-19 in May 2020, with the recent numbers in Feb 2021 recording a staggering 410% YoY growth with 1.156m units sold. While the bullish numbers are partly due to a low-base effect in Feb 2020 (start of Covid-19), it still recorded a positive growth of 2.7% YoY when compared to Feb 2019. Demand for automotive continued to be driven by the premium segment, largely centred on sport utility (SUV) and crossovers vehicles.

Further expansions in place for multi-year growth spurt sparked by automotive LED. D&O’s continuous efforts in product innovation, and to expand its global presence are starting to bear fruits as the group managed to maintain a healthy level of design-wins despite the pandemic. In addition, being one of the only two vendors in the world capable of offering full automotive LED solutions has made the group a go-to-source among Tier 1 customers. To accommodate higher orders, the group is in the midst of increasing its capacity by 25% in Plant 1 by 2HCY21. The group recently completed its Plant A (c.250k sq ft) which will cater for smart LED production in 2022. Given the bullish 5-year forecast from customers, the group is already planning for Plant B (c.330k sq ft) which will house the production of other cutting-edge exterior LED products in the pipeline, expected to be completed in 2023.

Record-breaking earnings ahead. D&O is running at maximum capacity, defying the typical seasonality. Barring any unforeseen circumstances, we believe the group is capable of delivering exceptional earnings for FY21 with each quarter posting strong YoY growth. This will be driven by the increasing LED content per vehicle as well as the adoption of the group’s proprietary smart LED in EVs and autonomous vehicles which are still at the introduction stage of their life-cycles, indicating ample room for growth.

Raise FY21E/FY22E core PATAMI by 31%/20% to RM131.4m/RM145.8m in anticipation of heightened demand for automotive LED.

Maintain OUTPERFORM with a higher Target Price of RM5.50 (previously RM4.20) based on FY21E PER of 48x, at +2SD to its 3-year mean.

Risks to our call include: (i) disruption of components supply, (ii) replacement/obsolescence of LED technology, (iii) adverse currency fluctuations.

Source: Kenanga Research - 7 Apr 2021